• HIGHLIGHTS
• The start of Madoff's investment advisory business
• The big unanswered questions about his fraud
• Hedge fund Fairfield Greenwich Group
• Just what's wrong with the SEC?

Tell me about how Bernie Madoff begins in this business.

He really started out as a self-made man. He had tried law school, didn't like it, dropped out. Did a variety of jobs. He was a lifeguard, as is well known. He installed sprinkler equipment, also part of the legend.

And he pulled together a stake with backing from some close friends and started this little trading firm back in 1960. Wall Street then was a very different world than it is now. There were these giant, traditional institutions -- the New York Stock Exchange, the American Stock Exchange. Nasdaq didn't exist yet. And it was a very, what they call a white-shoe world. It was a very walnut-suite, gray-flannel-suit place at the top.

And then down below where small, unlisted stocks traded, it was really a free-for-all. And small firms could get started with a little stake, trade unlisted stocks of sometimes reputable, sometimes not-such-reputable quality, and make a living at it if they had good instincts as traders.

Nobody disputes that Bernie Madoff had good instincts as a trader. He started this little stock-trading firm, one of many in Wall Street's outer fringes at that time, and slowly built it up. It was kind of like a wholesale firm. It didn't deal with retail customers like you and me. It dealt with big institutions that wanted to trade stock quietly.

So large companies eventually, like Schwab and Fidelity, would bring orders that they were getting from their retail clients and say, "Bernie, can you handle these trades?"

Exactly. Now, for great big liquid stocks that traded on the New York Stock Exchange, over time those big institutional traders developed their own trading capacities. But for less liquid stocks that traded less frequently, that took some skill, some deft timing. And they would be likely to go to a specialist wholesaler like Madoff for trades like that.

And so that's what he's known for?

Yeah.

Through the '60s, '70s? And he's not well-known?

Not well-known outside that very tight-knit world of stock traders. Wall Street exists on kind of two levels. There's the retail investment banking level that we see from the outside -- the fancy limousines, the big investment-banking deals, the IPOs [initial public offerings], the retail accounts, the brokerage-on-the-corner places you and I would trade stock.

And then there's kind of the plumbing. There's the infrastructure that makes it run: the gears, the cogs. And that's where the traders are. That's where they operate. So the public doesn't see them. And even the fancy guys in suits upstairs don't see them. But you can't run the market without them. And in that world, Bernie Madoff was very well-known and became increasingly well-known as that world began to be hit by the massive technological changes of the computer age.

So this infrastructure that Bernie is so good at doing, handling actual trades, begins to change over time?

Slowly at first, but then gradually much more rapidly. We've seen the way technology has affected many, many industries, and stock trading was no different. And as with other industries, there were the traditionalists who kind of felt they could hold back the electronic tide. And then there were the accommodationists, the visionary --

The early adopters?

You could say the early adopters, who could say: "OK, it's changing. I'm going to go with it." And Bernie fell in that category.

He could see the way electronics were going to change things. The first massive manifestation of that, of course, was the Nasdaq market, which was the first effort to develop an electronic exchange.

Now, it really was very primitive based on what we know of today. It was computer screens on which stocks with bids and asks would be posted. But the actual trading still occurred by telephone. You'd see something on the screen, and you'd pick up the phone and call the guy. But still it was different than standing in a pit at the New York Stock Exchange or at the American Stock Exchange or various regional stock exchanges in Boston, Philadelphia, Chicago and trading shares of stock face to face. Very different than that. And there are a dozen people who could make a legitimate claim to being one of the fathers of Nasdaq, and Madoff is one of them. He worked assiduously for the notion of an automated stock exchange, and in his capacity as an officer and on the board of the NASD [National Association of Securities Dealers] helped Nasdaq get born.

He continued to push for increasingly automated ways of trading. And regulators heard that message and [became] more in sympathy with it, because automated trading was cheaper not just for you and me as retail customers but for big pension funds, for institutional investors who were responsible for government money and for institutional money. They were paying a lot for this face-to-face trading infrastructure that had existed for centuries, and this electronic trading promised a cheaper way to trade. ...

Madoff began to see and talk about its advantages to the overall system, how it would improve America's competitive advantage in the great financial marketplace that the world was becoming. And regulators heard that message and respected his opinion. He got drawn into the forums and the conferences and the public hearings where this issue got aired. And that added to his public stature, which was unusual for a guy on the trading side of the Wall Street world.

So he's a legitimate pioneer?

Yes. In that venue he was, certainly.

Now, there's another half or another piece of his business. So we have to be very clear that his whole operation, his trading operation is very different than his investment advisory.

Very different. The investment advisory business operated so far as we can tell completely under the radar. We don't really know how early it began. We know it was certainly decades ago. We don't really know why it began.

We know to some extent that it began small, because the people that I've spoken to who have been customers of his who go back the longest started with very small nest eggs. These were not the $10 million minimum deposits that we hear about later; they were small investors. He developed that investment advisory business at a time when the investment advisory business was far less regulated than it is now. Outside of the mutual fund world, which was regulated, investment advisers didn't operate in the kind of spotlight that they do today.

Often they weren't registered as investment advisers?

Often were not. In a way, it was sort of a casual sideline. If you were good at managing money, this was something that you may take on. And Madoff clearly did and started to attract a quiet reputation among the circles in which he moved.

In the '60s, '70s?

So far as we know, at least by the late '70s to early '80s. The regulatory attention that an offshoot of his attracted in 1992 had been in operation for a good long while, at least a decade, so we can push it back to the early '80s at least.

And what's the relationship between the two businesses that he's operating?

We're going to know someday a lot more than we do now, but it appears that he was careful to keep them quite separate. They were on physically different floors of the building he moved to several decades ago. The staff was completely segregated. They didn't pool services. We now know they even had a separate computer service system, which for somebody with Madoff's technical expertise is significant. He seems to have kept it quarantined, kind of encapsuled. He didn't do the trades people thought he was doing through the family firm that he'd founded, one of the premiere Nasdaq trading firms in the country. He said he did them elsewhere. He told people he did them through European counterparties, so that's why they didn't see all this heavy trading.

To be clear, in other words, his investment advisory business was moving trades not through his family business, not through his trading-floor operation, which is what a lot of people thought he was doing?

I think that must have been what they thought he was doing. I've looked at the customer accounts that people have shown me that they collected over the years -- stacks of them in the closets in some cases -- and it does look like frequent trades in very blue-chip stocks, the S&P 100s; he bought Walmarts and General Electrics, things that would be very reassuring. It's a very diversified portfolio showing up on these statements. And you would assume that he's trading those through his firm. But these are very liquid stocks. These are not the nature of the stocks that the Madoff firm made its reputation in, remember.

Small Nasdaq stocks?

Small Nasdaq stocks and then larger Nasdaq stocks, but not the S&P 100. That wasn't their claim to fame, if you will. So in a way, it was a little sensible. You could see the point that he wouldn't bother trading these enormously liquid stocks. It could trade anywhere in the world in a nanosecond. He wouldn't bother using the family firm for that.

So that throws out the idea that he was front-running in order to make money?

Well, it certainly casts some doubt as to whether or not that's how he was making money for this operation, as to whether or not he was front-running the family business trades.

The prosecutors have not yet defined the extent of his crime. We hope that we will know it at some point. We hope, given his cooperation, according to his lawyer, with this investigation that it will eventually become clear.

The question of when it became a fraud is fundamental to the Bernie Madoff mystery. ... It's a little hard for me to believe that at some point it shifted from being a legitimate money management business -- under the radar, quiet, but nevertheless legitimate -- into a Ponzi scheme, because the informational shift would have been so dangerous to Madoff. At some point people who had been working with you in your legitimate business would either have to be shut out of your continuing business or brought in on the fraud.

In other words, you would have had to say: "OK, now we're going in under the radar. We're going to go dark, to the dark side"?

There would have had to be some shift that would have been visible. In all the information that's come out since Madoff was arrested, we haven't seen anything that suggests that there was that tectonic shift.

And you must remember that in any fraud case, the more people who know about it, the more likely it is to break apart. This went on for an astonishingly long time for a Ponzi scheme. Therefore, the number of people who knew about it must have been very small. And it's hard to see how that could have been the case if it were at some point a legitimate, high-level and large-volume money management business.

Is it realistic to think that a small group of people could have handled the paperwork, the ordinary chores of putting out statements and confirmation slips?

Well, it was pretty primitive paperwork. You have seen it, I'm sure. The paperwork that customers got doesn't look like your statement from Merrill Lynch. It was primitive. The printing style was primitive. The format never changed.

But we're talking 13,000 customers over time, a lot of envelopes to stuff.

Yes, but stuffed by people who may not know what was in them. Stuffing the envelopes is the easy part.

But is 20 people on the 17th floor enough to handle that kind of an operation?

I think so. You didn't get weekly statements.

But you got confirmation slips all the time?

Not all the time. You would get monthly statements. You would get quarterly reports, and you would get an annual statement for tax purposes.

And confirmation slips when trades were made?

Yeah, but confirmation slips can be generated by a computer in a nanosecond. I have been exploring with a variety of people who know how the Wall Street bookkeeping works to see what their impressions are about the logistics of doing this. And several of them, including the former chairman of one of the nation's largest custodial banks, have said it wouldn't take many people at all to do that. So I'm hoping we'll know more about it, but the notion that there would have been 20, 30, 40 people involved in this and it never would've leaked out, I find that very hard to believe.

Talk about when it shifts from this sort of small money coming out of places like South Florida to the big money coming in from places like Greenwich, Conn.

... It moves upscale as Madoff moves upscale in some ways. As he becomes wealthier, more involved in philanthropic circles, more involved in country club circles, more involved in European circles -- he has his home in the south of France now; he has an office in Mayfair in London now -- he is exposed to a broader swath of people with considerably more money, and they know other people with considerably more money.

So I think the first orbit are these personal connections that Madoff begins to build. By now he's got a track record that people are whispering quietly about over the cocktails at the country club. And it's astonishing. And as the world becomes more and more turbulent, if you look back at a variety of market indicator charts, you see that from the late '90s up till today, turbulence breaking out in a variety of markets, commodities, bonds, the credit markets, then the stock markets, all of them in great turmoil. And Madoff looks like the sure thing, the quiet thing, the conservative, safe, sleep-well-at-night thing.

The "Jewish T-bill"?

The Jewish T-bill. And even for hedge fund managers, even for people out on the cutting edge of white-knuckle finance, you want to keep some of your money in a nice, safe, liquid place. That sounds like Madoff. So he became attractive as a quiet alternative to some of the big risks that hedge funds were taking around the world.

Now, as finance began to become more and more global during the '90s, dollars are being exported around the world as our trade deficit grows. People holding dollars around the world, whether they're in Europe, South Asia, in China, have to invest it in dollar-denominated securities. More money flows in to Madoff, and that pool of money starts to feed on its own reputation. People who have an in with Madoff start to attract attention. People try to mirror that performance and find that the only way to do that is to deal with Madoff. And then some smart guys come along and come along with some ways to double or triple your bets on Madoff.

Leveraging your investment?

Leveraging your investment.

Explain how that works.

At its basic form, leveraging an investment is simply borrowing some of the money you use to make an investment. So if I want to invest $4 million in what I think is a sure thing, I can use my own $4 million. And if I make 50 percent, that's great. That's a 50 percent return on $4 million. Or I can use my million dollars and borrow $3 million from you, and if I make 50 percent, I can pay you back. And the return on my million is extraordinary. So leveraging your investments is a way to get a lot more bang for your borrowed buck. But it's also extraordinarily risky.

So now you're saying that investors are able to go out there and say, "I'm going to invest in Madoff," and banks are willing to pour money in and help them do that?

Yes. The track record, which we all know now should have raised red flags from here to Sunday, were so attractive, and the mystique that surrounded that kind of money management had become so pervasive.

Remember what was happening during this period of time. The mystique of a world full of Warren Buffetts, a world full of geniuses who could make money for you had become so embedded in the financial psychology of this country and of other countries that it made Madoff increasingly plausible, unfortunately.

Because you had guys like [hedge fund managers] Jim Simons and Steven Cohen who were actually making enormous returns year after year after year?

Yes, yes.

So even a Madoff making you 12 to 15 percent wasn't so special given that you had guys making 100 percent?

Exactly, exactly.

But the fact that nobody could replicate his steady slope of returns wasn't a red flag for anybody?

Obviously it should've been. When he was questioned about it, and he was questioned occasionally, his explanation was: "Well, that apparently steady return is just the averaging. It was actually quite volatile in between the data points that were showing on the curve."

But he never had a down year?

He had a couple of down quarters. He would point to those. He never had a down year. Now, if he were a more visible money manager, that would've been talked about, doubted, skeptically written about to a much greater degree. He stayed off the radar screen, so he stayed out of that kind of skeptical spotlight.

Now, the first time that the SEC [Securities and Exchange Commission] gets close to him, the first time a federal regulator gets close to him is 1992?

Correct.

And what happens?

Well, the federal regulators didn't even know they were getting close to him. They knew they were getting close to a pair of accountants down in Florida who had been bringing in investment money at a great pace, hundreds of millions of dollars, to invest in this security that they appeared to have created.

Do you know how that investigation began?

... I don't know what the initial tip was, but when it was investigated, I think the concern was that there was a small, fly-by-night organization taking in money for who knows what purpose and then squandering it or spending it or shipping it offshore.

They thought they had a Ponzi scheme?

They thought that they had one of these short-lived, fly-by-night Ponzi schemes. And when they sent investigators in, they found ... actually there was money being sent to a supposedly legitimate organization, Bernie Madoff in New York.

And the money was all there, according to Madoff. Now in hindsight, you can look back and say, well, my God, why didn't they go to Madoff's offices and say, "Show us the bank accounts"? But they didn't. They focused on the actual securities law violations that had occurred in Florida. Selling unregistered securities is against the law, and holding yourself out as an investment banker with those securities is wrong. And the people who had done that were disciplined, were chastised and were fined.

But looking back, you can certainly say that there were doors, locked doors in that case that should have been hammered on and pushed open.

Does the fact that Bernie Madoff returned all $441 million to those accountants who then returned it to their clients mean that it was a legitimate operation at that time?

Not necessarily. Many people point to that and say that it must have been legitimate because he was able to raise that much money. But we don't know how he raised it. We don't know where he got it. What we do know, though, is that throughout the life of this Ponzi scheme, according to prosecutors, throughout its life people constantly said, "I could always get my money just like that."

It never raised any red flags. Even the sovereign wealth fund of Abu Dhabi was able to withdraw hundreds of million of dollars just like that. So it should have been reassuring that the money could be immediately returned and then returned to investors.

It no doubt was reassuring to regulators. But Madoff did that time and time again. He did it time and time again during a period of time that prosecutors are very clear was probably the height of the Ponzi scheme.

But he's always expanding the base of his pyramid scheme?

Taking in more new money. And apparently by 1992, if we assume that he was [running] a Ponzi scheme by then, he had enough money to come up with $400 million to hand back to accountants and investors, who, by the way, most of whom handed it right back to him and wanted him to keep managing it for them.

And it's interesting then that in 1991, Fairfield Sentry starts up and running --

Yes.

-- a year before he's returning $441 million.

Yes. And they start marketing themselves aggressively.

I want to talk about Fairfield Sentry in a second, but let's go back one second. So the SEC shuts down these two accountants [Michael Bienes and Frank Avellino] because they were issuing promissory notes which were deemed unregistered securities?

Correct.

And they were shut down because they were not registered financial advisers in doing this?

Correct.

Ironically, Bernie Madoff doesn't register as a financial adviser, isn't required to until much, much later, until 2006. Why not in 1992? Why would he be given a pass if these two accountants are busted for the very same violation?

An aggressive regulator could have perhaps pushed it further. But it would also have been possible for Madoff to say: "I'm not retail. I'm not attracting customers. These guys brought their money to me. I'm not holding myself out as an investment adviser."

But when they're shut down, he turns right around and starts becoming a retail operation?

But I'm not sure regulators realized that. There's an extensive investigation under way inside the SEC about what they knew, when they knew it and what they should have known.

Going all the way back to '92 investigation?

I suspect it will. The inspector general hasn't said, but I suspect it will. And when they do that we will know whether or not regulators realized that after they had dusted their hands off and gotten the money safely back in the hands of those investors, if they knew what happened to it then, because a large number of them gave it right back to Bernie.

Well, what does that say about the teeth in the SEC?

Well, the SEC is not a criminal agency. It's a civil regulator. It always has been. It has enormous responsibilities for the scope of its resources. They felt that they had averted a Ponzi scheme; they had protected investors. It's 1992. Penny stocks are exploding as an area of fraud. Internet financial fraud is on the rise. Insider trading is still a serious problem. They had a lot on their plate. I could make a sympathetic case for the fact that they had a lot of other things to do. But looking back at the red flags that were present in that 1992 case, it's really hard to understand why it wasn't pushed forward.

And interestingly, the lawyer that was operating at the time is the same lawyer that Bernie Madoff now retains?

The lawyer who represented the people who were investigated by the SEC at the time, yes, is now representing Bernie Madoff.

So let's talk about Fairfield Greenwich [Group]. There are a few hedge funds that are at the center of this, but none more so than Fairfield Sentry [one of the funds Fairfield Greenwich set up to invest with Madoff].

They seem fairly central, yes.

What's the history of Fairfield Greenwich?

... Fairfield Greenwich started as a small-scale investment advisory business led by a fellow [Walter Noel] who had a pretty good reputation on Wall Street -- you know, well connected in the traditional banking world, institutional investment world. He attracted a partner who also had a good track record, Jeffrey Tucker.

They joined forces and got Fairfield Greenwich up and going. Fairfield Greenwich really began to go global, though, as Walter Noel, one of its founders, formed relationships with wealthy families and big, wealthy institutions in Europe and Latin America. His bevy of lovely daughters married into families that were well known in those moneyed circles.

In Latin America and Europe?

In Latin America and in Europe. And [Noel] began to market Fairfield Greenwich as an investment to the wealthy people that they know. This is an aspect of finance that's, you know, been around forever. Some people call it private banking; some people call it merchant banking. But it's the way wealthy people hear about investments, hear about opportunities. And the Fairfield Greenwich sales team, if you will, the Walter Noel extended family began to market its services far and wide.

That began to attract competitors who were also interested in getting similar kinds of returns and who began to develop copycat funds or funds that could mirror the Fairfield Greenwich performance.

Fairfield Greenwich put out statements about their due diligence process being deeper and broader than a typical fund of funds.

They did. In fact, they also made much of the fact that one of their founding partners was a former senior regulator. If you look at the sales material that they distributed in Europe, which I'd done, and you see the way that they describe the people who are Fairfield Greenwich, Jeffrey Tucker's credentials as a former senior regulator in the New York office of the Securities and Exchange Commission is made much of. Certainly he would know how to do due diligence into the kinds of funds that they're investing in. So yes, they made quite [a] statement. Their franchise was due diligence in service of their investors.

As best you know, what was their due diligence operation? What did it consist of for Fairfield Sentry?

Well, we're kind of limited in that they are not talking about what they did. But what they described that they did, if you read it in the offering statements and read what they say they did, it's a little hard to understand how they could have missed what was going on.

But you have to be cautioned by the fact that they put most of their own personal wealth in this fund as well, so it's equally hard to believe that they thought it was a fraud.

Perhaps they thought it would last a little longer.

Well, it's always dangerous to figure you'll be the first guy out the door before the stampede. One of the most mystifying things about the Madoff mystery, really, is the fact that so many people that you would look to as potential tripwires, alarm bells -- people who should have noticed, might have noticed, who could have reported it -- invested in it. Now, was that because they thought Bernie had some gimmick that they would detect, profit from and get out in time, or was it because they actually believed it?

But there were warnings. There were articles in Barron's. There was an article in the MARHedge report (PDF), a hedge fund newsletter. [Whistleblower] Harry Markopolos was ringing the alarm bells for some time.

Yes.

Aksia, Acorn, Merrill Lynch, even JPMorgan got a little jittery and got out. There were warnings.

There clearly were warnings. And you have to get down into the psychology of a marketplace -- the psychology of a mania, popular delusions, the madness of crowds -- to really understand why people ignored those warning signs. It's happened before. There were warning signs about the tech stocks. There were warning signs that many of these companies had no business plan, no revenues, no expectation of every having any revenues and could not possibly be worth what you just paid for them. In that environment, in that context, it looks a little more understandable. It's in hindsight that it becomes incomprehensible.

What were we thinking?

What were they thinking? As they looked at this track record, as they looked at this primitive infrastructure, just a little bitty accounting firm -- there's a little bitty operation, this guy that most people had never heard of -- what were they thinking? And we don't really know. We don't know how Madoff was able to deflect the suspicions of people like Walter Noel at Fairfield Greenwich, of people like Ezra Merkin at Gabriel Capital. We have no idea how he was able to be so persuasive.

Tell me what happened at JPMorgan. You wrote about it in The New York Times.

Well, JPMorgan Chase was one of a number of banking institutions who offered investors a way to bet on Bernie Madoff on a leveraged basis -- to double up their bets, triple up their bets. They were approached in some cases, and in other cases marketed themselves a series of notes. And these notes were kind of like a promise to pay. They agreed that they would pay the holder of that note three times the annual performance of Fairfield funds in exchange for a certain fee that an investor would pay to the bank.

Now, to hedge that bet, the bank has promised that at five years down the road, they're going to give you a sum of money equal to what Fairfield Greenwich has earned. To hedge that bet, they themselves put money into Fairfield Greenwich, as a hedge. At some point, in the fall of 2008, they started to withdraw that money.

And between September and the time Madoff was arrested in December, they had gotten all but a couple of dozen million of it out. They had, at one point, had about $250 million invested with Fairfield Greenwich.

The explanation that they have given is that some due diligence concerns arose -- not serious enough, not certain enough, they say, for them to have gone public, but concerning enough to them that they withdrew their money from Fairfield Greenwich. There are a number of investors who held those notes, mostly European investors, who cried foul when they heard that JPMorgan had pulled out. They bought the notes from JPMorgan.

But JPMorgan pulls out their money but does not tell the investors that they have brought into this scheme about the fact that their due diligence was raising red flags.

They did not. They're under no obligation to. I've read the sales documents, the three or four inches of them, for those notes, and it clearly and specifically said, "We have no obligation to tell you about any change that we discover in the underlying portfolio that we're trying to track here."

But people are trusting JPMorgan Chase to manage their money, essentially. I mean, they're offering a product, and you're saying they were under no obligation to warn you if the product is looking a little shady?

I'm not saying that; they are. That's what the offering documents did say that they had decided. To give them the benefit of the doubt, there are two reasons why they might have felt comfortable. There are two reasons why they might have wanted to remove their hedged position from Fairfield Greenwich. One -- and this is the explanation that has so many European investors so agitated -- one thesis is they smelled a rat, and they got out early and didn't do anything to protect the investors who had bought these notes.

Their customers.

Another explanation is they said: "Well, we've promised to pay these investors three times the return of Fairfield Greenwich going forward. But looking at Fairfield Greenwich, we don't think it's going to make any money going forward, ... and so we don't need to be hedged, because we don't think this fund is going to continue the steady upward performance that it's had in the past." That would have been a perfectly rational reason to take your hedge off as well.

We don't know what explanation explains it. We don't know which theory explains what they did. But there certainly would have been an explanation that they could have offered that said, "We just don't think the fund is going performing very well, so we don't need the size of the hedge that we've laid on."

We saw a lot of outrage in Congress against the SEC because regulators sat there. Is this just a broken organization? Is this an organization that's been crippled by deregulation? Just what is wrong with it, in your view?

I've covered the SEC for almost 40 years, and I've seen it do amazing work over time. I have seen dogged, tenacious investigations that took a lot of ingenuity, and a lot of foundational understanding about how Wall Street works. Even during the period of time when it was clear that the SEC was ignoring serious warning signs about Bernie Madoff, they brought some important cases. They carried out some very important investigations, and carried them out successfully. But over the past eight to 10 years two things happened.

First of all, the volume of work that the SEC had to do exploded; its resources did not. Second of all, a thesis emerged within the agency that it was too much of a burden on the American economy, that it needed to be more careful about not bringing cases unnecessarily. It needed to be more careful about not imposing ridiculous and ruinous fines on people for just minor technical violations. These were embedded in policy under Christopher Cox, [SEC chairman under George W. Bush, 2005-2009]. The policies of the agency changed in ways that, looking back now, we can say clearly were a deterrent to aggressive enforcement action.

Where were those policy signals coming from?

They were coming from the commissioners who had been appointed, and chiefly from the chairman. They reflected an attitude that was common throughout Congress: that the marketplace would protect itself; that the big players, the big institutions, they were going to do the due diligence. You didn't have to have lots of little civil servants at the SEC running around, trying to protect them. They would look out for themselves.

And in a global marketplace, for the United States to remain competitive, it could not have the toughest, sternest, most persnickety nanny on the beat. It was competing with London. It was competing with Tokyo. It was competing with other regulatory regimes. And if it was out of step with them, the U.S. was going to lose business. Money would flow overseas. There are no borders for capital anymore.

This was the argument that was made in Washington to support a deregulatory regime that the people who were carrying it out, I think, genuinely believed was in the best interest of a robust, exuberant and growing marketplace. But the message that developed around that, within the ranks of enforcement regulators, was they weren't looking for you to police the beat in as stern and aggressive a way as you used to. It was harder.

I mean, imagine if the cop down at the precinct is told: "Well, we want you to arrest all the bad guys. But before you arrest them, you've got to get these five people to sign off on it. And it's got to happen at a public staff meeting which, let's see, we're having in about five weeks." Well, the message you get -- and that's exactly the regime that was imposed at the SEC -- is, "We don't think it's real urgent that you go out and serve subpoenas in this case, because we're making it harder for you to get the formal orders from us you need to go out and serve those subpoenas."

What you're saying is there's an irony in having congressmen lambaste, excoriate these SEC employees when it was the Congress, the White House, the atmosphere in Washington, the competitive pressures, that took the pressure off?

It's a delicious irony. In retrospect, you do have to wonder, what were they thinking? How can they come back now and say, "How did you let this happen?," to a panel of SEC employees who were not in the position to set the policies that they were carrying out?

So Congress has some responsibility here for taking pressure off the SEC, as does the Bush White House?

I'm a reporter, not an editorialist.

But you described an atmosphere in which the London Stock Exchange was threatening to usurp the role of the New York Stock Exchange, the globalization of the business world of trading of securities, as reasons for why this happened; that it was a Congress, during the 2000s, during the Bush administration, that --

And in the late years of the Clinton administration.

And in the late years of the Clinton administration.

It really goes back earlier than the Bush administration.

So both Clinton and Bush administrations were laissez-faire when it came to the SEC, and the signal got down to them that they were not to push too hard?

The signal got down to them that they'd better be really, really, really, really sure before they push too hard. It's just not possible to be that sure at the early stages of an investigation. I think inevitably the message that was coming out of the White House and Congress was that an overly aggressive enforcement stance would be detrimental to the competitive interests of the United States, and that message had to have affected the enforcement policies, the enforcement energy of the SEC, over this period of time.